Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: MMC is a professional services firm operating in three principal segments: Risk and Insurance Services (Marsh), Investment Management (Putnam), and Consulting (Mercer). The company employs approximately 59,000 people globally.
Key Financial Metrics
| Metric (in millions) | Q1 2003 | Q1 2002 |
|---|---|---|
| Operating Revenue | $2,852 | $2,635 |
| Operating Income | $717 | $687 |
| Net Income | $443 | $418 |
| Diluted EPS | $0.81 | $0.73 |
| Operating Margin | 25.1% | 26.1% |
| Cash from Operations | $177 | ($198) |
| Cash & Equivalents (End of Period) | $566 | $543 |
| Total Debt (Short + Long Term) | $3,653 | N/A |
Note: Total Debt calculated as Short-term debt ($772M) + Long-term debt ($2,881M) as of March 31, 2003.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 8% year-over-year (4% on a constant currency basis). Growth was driven by the Risk and Insurance Services segment (+20%) and Consulting (+12%), partially offset by a decline in Investment Management (-25%).
- Profitability: Net income rose 6% to $443 million. Operating income increased 4% to $717 million.
- Cash Flow: Operating cash flow improved significantly, turning from a $198 million outflow in Q1 2002 to a $177 million inflow in Q1 2003. This was largely due to lower tax payments in 2003 compared to the significant tax payments made in Q1 2002 related to 2001 events.
- Segment Performance:
- Risk & Insurance: Revenue grew 15% on a constant currency basis due to higher premium rates and net new business.
- Investment Management: Revenue declined 25% as average assets under management (AUM) dropped 21% to $244 billion, reflecting equity market declines and net redemptions.
- Consulting: Revenue grew 5% on a constant currency basis, driven by retirement services and health care consulting.
Guidance, Outlook, and Risks
- Debt Management: In February 2003, MMC issued $500 million in senior notes (due 2008 and 2013) to pay down commercial paper, extending the average maturity of its debt and converting floating rates to fixed rates.
- Share Repurchases: MMC repurchased 7.8 million shares for $321 million in Q1 2003 and intends to continue repurchases subject to market conditions.
- Forward-Looking Risks: Management highlights risks related to the September 11, 2001 attacks, including potential insurance recoveries and financial losses. Other risks include competitive conditions in insurance markets, fluctuations in foreign exchange rates, and volatility in equity and fixed income markets affecting the Investment Management segment.
- Accounting Changes: MMC is assessing the impact of FASB Interpretation No. 46 regarding the consolidation of Variable Interest Entities (VIEs), specifically related to $2.3 billion in CDOs and CBOs managed by Putnam. Management does not expect a significant impact on results.
Investor Verification Checklist
- Assets Under Management (AUM): Verify the trend in Putnam's AUM ($241 billion at quarter-end) and the impact of net redemptions versus market value changes on future revenue.
- Insurance Market Conditions: Monitor the "hard market" conditions in commercial liability and property insurance, as premium rate increases are moderating in some areas.
- Debt Structure: Confirm the reduction in commercial paper and the effective interest rates on the new senior notes issued in February 2003.
- Restructuring Costs: Review the remaining balances of the 1999 Sedgwick/McC and 2001 restructuring plans, which still have outstanding accruals for rent and severance.
- Contingencies: Assess the status of claims related to the ILU Guarantee and other litigation, though management currently expects no material adverse effect.